EDHEC-Risk Institute conducted its 10th survey of European investment professionals about the usage and perceptions of ETFs, as part of the Amundi research chair at EDHEC-Risk Institute on “ETF, Indexing and Smart Beta Investment Strategies”. The aim of this study is to analyse current European investor practices and perceptions on ETF and smart beta strategies. By comparing our results to those of our previous surveys, we aim to shed some light on trends within the ETF market and within the smart beta strategy offer.

Felix Goltz

The Background section, which constitutes the first part of the document, comprises two parts. In the first part, we review the European ETF market and explain this financial product in more detail. This part goes over European investors’ views on ETFs, their present uses of ETFs, and the future developments they require.

The second part of the Background section is fully dedicated to investor views on smart beta strategies and their requirements for further improvement. Our respondents are high-ranking professionals within their organisations (35% belong to executive management and 35% are portfolio managers), with large assets under management (39% of respondents represent firms with assets under management exceeding €10bn). Respondents are distributed across different European countries, with 19% from the United Kingdom, 60% from other European Union member states, 16% from Switzerland and 5% from other countries outside the European Union.

Since 2006, EDHEC has annually surveyed European investors about their views and uses of ETFs. Since 2013, in view of the recent considerable development of smart beta strategies, additional questions have been added to the survey, allowing participants to give their opinions on products that track smart beta indices. In the present edition of the survey, we dedicate a large group of questions not only to ETFs that track smart beta indices, but also to their general use of and opinions on smart beta strategies. This survey brings together the main strands of passive investment, namely ETFs – which are standard and very liquid products that track indices – and strategies based on the new forms of indices.

ETFs are perhaps one of the greatest financial innovations of recent years. Unlike conventional index funds, ETF units trade on stock exchanges at market-determined prices, thereby combining the advantages of mutual funds and common stocks. Most of them represent passive instruments designed to track the performance of a financial index as closely as possible.

Key findings of the latest survey included the following:

HOW DO INVESTORS SELECT AND USE ETFS?

Since 2006, the increase of the percentage of respondents using ETFs in traditional asset classes has been spectacular: in 2006, 45% of respondents used ETFs to invest in equities and 10% to invest in fixed income, compared with 91% and 65% respectively in 2016

Gaining broad market exposure remains the main focus of ETF users for 71% of respondents (despite variations, values obtained in 2016 are equal to the long-term mean, from 2009 to 2016)

Costs and quality of replication are the two criteria dominating investor preoccupations, related to the main motivations for using ETFs: reducing the investment costs, while tracking the performance of the index. Qualitative criteria considered by investors are the long-term commitment of the provider and broadness of the range (38% of respondents for both criteria)

About two-thirds of respondents (67%) used ETFs to invest in smart beta in 2016, a considerable increase compared to 49% in 2014

KEY OBJECTIVES DRIVING THE USE OF SMART BETA STRATEGIES

The most important motivation for adopting smart beta strategies is to improve performance and manage risk

Replication of smart beta strategies are chosen for the following reasons: costs, transparency of methodology and availability of information, which represent the main reasons why passive strategies are normally selected. Discretionary strategies are preferred for the reactivity and dynamism they allow, with 68% of respondents indicating the ease to change portfolio allocation as the principal advantage

The pieces of information respondents consider important for assessing smart beta products are liquidity and capacity, index construction methodology and transaction costs. There is an important gap between required information and ease of access to this information. For example, data-mining risk and liquidity and capacity, which are crucial for respondents, are among the most difficult pieces of information to obtain

FUTURE DEVELOPMENTS ON ETF & SMART BETA PRODUCTS

63% of investors actually plan to increase their use of ETFs in the future despite the already high maturity of this market and the current adoption rates (compared with 55% in 2014 and 57% in 2015)

Top concerns for the respondents (54%) are the developments of ETFs in at least one of the following three categories: ETFs based on smart beta indices, on multi-factor indices, and on single-factor indices. The development of ETFs in the equity asset class is also one of the top concerns of respondents

The vast majority of respondents (94%) plan to increase their investment in smart beta products over the next three years

When asked about the smart beta solutions they think required further product development from providers, results indicated the areas of fixed-income and alternative classes. Respondents would also like more customised solutions to be developed. The development of new products corresponding to these demands may lead to an even wider adoption of smart beta solutions

The research from which this study is drawn was produced as part of the Amundi research chair at EDHEC-Risk Institute on “ETF, Indexing and Smart Beta Investment Strategies.”